What is a Business? (3.1) Flashcards
A business is…
Any organisation that makes goods or provides services.
Service :
Intangible things that the business offers.
What motivates people to start their own business :
- Flexible hours.
- Being their own boss.
- Creative freedom.
- Personal satisfaction.
Why do some start-ups succeed?
- USP.
- Gap in the market.
- Good planning, calculated risks.
- Realistic ideas.
Why do most businesses fail?
- Competition.
- No USP.
- Bad planning.
Consumer is the person who…
Uses the product.
Market :
Any place where buyers and sellers meet.
Adding Value :
The process of making the product more valuable to the producer.
- During each stage of the production process.
6 Ways of Adding Value :
- Speed + excellent service.
- USP.
- Product features and benefits.
- Branding.
- Quality.
- Convenience.
A business adds value when the selling price…
Of an item produced is higher than the cost of resources to make it.
Loss Leader :
Sell product/service for less than it costs to make.
Primary Production :
- Involves acquiring raw materials, e.g. metals and coal have to be mined.
(sometimes known as extractive production).
Secondary Production :
- Manufacturing and assemble process, it involves converting raw materials into components, e.g. making plastics into oil.
- Also involves assembling the product, e.g. building houses, bridges and roads.
Tertiary Production refers to…
- Refers to the commercial services that support the production and distribution process, e.g. insurance, transporting and advertising etc.
Hierarchy of aims :
- Mission statement and corporate aims.
- Corporate objectives.
- Functional objectives.
Aim :
Overall, what a business wants to achieve.
Mission Statement :
A mission of a business, it’s overall purpose or main cooperate aims (to motivate).
- Puts corporate aim into fancy words.
- Purpose, values and beliefs.
Corporate/Strategic objectives :
Goals of a business as a whole.
Functional (department) objectives :
Objectives for each department.
SMART stands for :
S - Specific.
M - Measurable.
A - Achievable.
R - Realistic.
T - Time specific.
6 Objectives examples :
Profit, growth, survival, cash flow, social and ethical.
- There needs to be a good balance between long-term and short-term objectives, to motivate people as they go.
Profit :
Financial gain that a business makes from providing goods and services.
- Occur when the revenue of a business is greater than the cost it incurs.
Profit formula :
Total revenue - Total costs
Total revenue formula :
Selling price x Quantity sold
Fixed costs…
Don’t change with output.
- Rent, Salaries, Advertising
Insurance.
Variable costs…
Rise and fall when output changes.
- raw materials, wages, packaging supplies.
Variable cost formula :
Variable cost per unit x number of unit.
’()’ means…
(Exam Technique)
Negative number.
How does the cost of producing products help make business decisions :
- To help with setting prices.
- Impact HR training/development.
- Supporting budgets.
- How much needed to pay employees.
Why is profit important? (4)
- Profit is the return for taking a risk.
- Profit measures the success of an investment.
- Profit is an important source of finance.
- Profit can motivate people.
(Ownership) Public Business :
Owned and ran by the government to provide for the public rather than make a profit, e.g. NHS, Army etc.
(private sector)
(Ownership) Private Business :
Owned by private individuals. Non-profit organisations such as charities are also part of the private sector.
(still public limited companies, PLC’S)
Unlimited Liability :
The owner of the business being legally responsible for all the debts of the business. Same legal identity as business.
(COULD LOOSE PERSONAL ASSETS)
Businesses with Unlimited Liability :
Sole traders and Partnerships.
Limited Liability :
The owners of the business only having part responsibility for the debts of the business. Separate legal identity.
(CAN’T LOOSE PERSONAL ASSETS).
Sole Trader & Advantages + Disadvantages :
Individual, unlimited liability, personally responsible for business debts.
+ Own decisions, get all profit, quick + easy to set up.
- Unlimited liability, limited expertise, harder to raise finance, long hours.
Partnership & Advantages (2) + Disadvantages (3) :
Started and owned by more than one person. Legal partnership agreements cover how profits are shared, decisions and what would happen if one leaves.
+ Skills&ideas from others, greater potential to raise finance.
- Unlimited liability, disagreements?, complicated to sell/close.
Private Limited Companies :
(ltd)
- Can’t sell shares to the public.
- Not sold on the stock exchange.
- May not be able to sell shares unless other shareholders agree.
- Often a family business.
Shares :
% of business.
Ordinary Share Capital :
Shares are sold by companies to raise money, money raised in this way is called ordinary share capital.
- Usually used for a long-term investment.
Public Limited Companies & shares :
- Can sell shares to public.
- Shares quoted and sold on the stock exchange.
- Shares can be bought/sold through stockbrokers, banks and share stops.
(PLC)
Public Limited Companies Advantages (4) + Disadvantages (4) :
+ Raise finance easily, limited liability, stable form of structure, can pay less tax.
- Have to release financial info (can be used as 2ndry research), greater admin costs, must give away a % of business, could also be conflict between shareholders.
Social Enterprise/Not for profit organisations :
- Benefit the community.
- Have the social aims.
- Includes charities, housing associations, community development trusts.
Stock Exchange :
Where shares are sold.
~ Shares are a percentage of a business, they may provide profit to a buyer, however the owner of the business will loose some money + control.
In return for their investment, Shareholders are paid a…
Dividend, a proportion of the profits earned by the company (given as a fixed amount per share).
~ These don’t always get paid out, loaned must be repaid first and a company may choose to re-invest their profits into the business,
Market Capitalisation :
Total value of all the ordinary shares issued by a company.
Market Capitalisation Formula :
Number of issued shares x Current share price.
Market Capitalisation example :
e.g. 25,000 shares for £1 each, ordinary share capital is £25,000. If price of shares rises to £4 and shares are fully paid for, then the share capital will remain at £25,000 but market capitalisation will be £100,000.
Shareholders :
Owners of the company (must own at least one share).
~ Stocks and shares are sold on the stock exchange.
Stock :
A type of security that represents ownership in a corporation.
~ Can own one share of stock or many shares.
Main roles of Shareholders :
~ Provide funds.
~ More shares = more power,
~ Most shareholders are not involved in running the business (plc’s).
Dividends :
Payment from the accumulated profits earned by a company to shareholders who qualify for such a payment.
~ Can only be paid if the company makes sufficient profit.
~ Authorised by shareholders.
Why would someone want to buy shares? (6)
- Capital gain (buy shares low, sell at greater price).
- Get dividends in return.
- Want to be involved in running/supporting a business.
- Believe in the aims + objectives.
- LTD, help the company survive + grow (support family/friends).
- Venture capitalists (dd), to make large return back.
Private Limited Companies (LTD’s) have control over their…
Share prices as they sell to family and friends.
Share price is decided on…
How well the business the business is currently doing, between the two parties.
Public Limited Companies & Share prices :
- Sold on stock market.
- Determined by supply and demand.
- If more people want to BUY shares, price goes UP (demand higher than supply).
- If more people want to SELL shares (demand goes down) so price DECREASES.
(Share prices move up + down) PERFORMANCE OF COMPANY :
- Better performance leads to bigger dividends so an increase in demand, increasing share prices.
- If there’s low profits, people may want to sell shares, increasing supply and reducing share price.
(Share prices move up + down) SPECULATION AND RUMOURS OF NEW PRODUCT LAUNCHES AND COST SAVING INITIATIVES :
- Might generate investor interest.
- If rumoured activity is likely to increase profits, then people will want to buy shares (increase in demand) meaning share prices will also rise.
(Share prices move up + down) CURRENT SHARE PRICES :
- If share price is low, investors may think they can get a bargain if they buy now, hoping that the price will increase in the future.
- If share price is high, shareholders may decide to sell shares to make a capital gain.
(Share prices move up + down) INTEREST RATES :
- When interest rates are low, reward for saving money in a bank is reduced, increasing the demand for shares because the financial rewards are likely to be greater than the interest that would be earned on a bank account.
- If interest is high, less likely to invest as they get more from keeping money in bank.
(Share prices move up + down) THE ECONOMY :
- When economy is strong, people have more money to invest and more confidence, increasing demand and share price.
- Weak economy, people are less likely to risk money, decreasing demand and share price. Less disposable income. Businesses may offer more shares to try and raise share capital, increasing supply.
Rights Issued :
When a company issues existing shareholders a right to buy additional shares in the business.
Rights Issued, extra :
- Company will offer the shareholders a specific number of shares at a specific price.
- Will also set a time limit for the shareholders to buy the shares.
- Shares often at a discounted price to encourage shareholders.
- If not wanted, they will be sold on the stock market as ordinary shares.
3 types of Sectors :
- Private (plc’s too).
- Public (gov, e.g. NHS, Army).
- Voluntary.
Satisficing :
Just making do, surviving.
Private Sector, (80% of economy) :
- Business enterprises.
- Produce most goods/services.
- Most are very small.
- Set up by entrepreneurs.
- Sole traders, partnerships, private limited companies, public companies.
Public Sector, (19% of economy) :
- Many goods/services not suitable to be produced by private businesses.
- Often produced by the Gov.
- May not have been able to make profit from services OR too important to just allow private firms to run.
- e.g. BBC, NHS, Schools, Army.
Voluntary Sector, (Less than 1% of economy) :
- Includes charities and societies that exist to help people e.g. Oxfam, Cancer Research.
e.g. BBC uses TV licences.
Privatisation :
Moving from the PUBLIC to PRIVATE sector, e.g. Royal Mail.
- Government sells off some of what it owns to private investors.
- Can gain money but loose control.
Private Sector Objectives :
Sales & profit maximisation, survival, growth, be ethical, become multinational. Good reputation.
Public Sector Objectives :
Provide public service to community, financial return (must pay for themselves).
Voluntary Sector Objectives :
Help community, make money (e.g. through donation), maximise a return for their cause. Fulfil their mission.
Business Environment incorporates all of the…
Incorporates all of the internal and external factors that affect how the company functions including employees, customers, management, supply and demand and business regulations.
The word ‘environment’ has lots of meanings : (5)
~ Safety
~ Culture
~ Happiness
~ Political Factors
~ Business Confidence
What can a happy & safe environment achieve?
~ Word harder.
~ Increased confidence + motivation.
~ Concentrate better.
~ Good reputation.
Consumer Confidence :
How confident customers are in spending money.
Business Confidence :
How confident businesses are that people are spending.
Differing Political Environment :
~ Might make too many regulations for businesses to follow.
~ Some can create a very politically friendly environment for businesses.
(How the external environment can affect costs and demand) Competition…
~ If this decreases, then there will be increased demand which means business can reduce costs spent on marketing.
(How the external environment can affect costs and demand) Marker conditions…
~ Involves things like politics, labour supply, income/economic, seasonal demand etc.
(How the external environment can affect costs and demand) 6 influences :
~ Competition.
~ Marker conditions.
~ Incomes.
~ Interest rates.
~ Demographic factors.
~ Environmental issues and fair trade.
ADVANTAGES & DISADVANTAGES of behaving Ethically (4) :
+ Attract ethically conscious customers, feel better about yourself, good reputation, more employees will want to work for you (bigger choice).
- Costs more, less hours worker, customers may not care, can be time consuming.
